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INSIGHT: What GCs Need to Know About the Government When Reopening

By Donald F. McGahn II and Brett A. Shumate

May 8, 2020, 8:01 AM

Former White House Counsel Donald F. McGahn II and former Justice Department Deputy Assistant Attorney General Brett Shumate, both now partners at Jones Day, discuss the myriad of litigation, investigatory, reputational, and political risks awaiting businesses as they consider reopening during the pandemic. They discuss five key issues general counsels should consider when advising firms dealing with the government post-pandemic.

For most businesses and industries, the shift to a “post-Covid” (or at least post-outbreak) world will present legal challenges for which most companies have little precedent or relevant institutional memory.

Despite optimistic talk of “reopening” the economy and getting back to work, American businesses continue to face a patchwork of state and local orders dictating when they can open, how employees can work, and when consumers can leave home.

Evolving variants of these orders are likely to remain a fact of life—even after we “flatten the curve”—and the path forward will not be linear.

As businesses prepare to reopen, general counsels ought to be mindful of federal guidance, state and local orders, and related long-term litigation, investigatory, reputational, and political risks. Government—for better or worse—is now the prime mover for the foreseeable future. The interpretation and application of emergency orders and Covid-specific statutes will now be a predicate issue to many traditional legal issues facing companies.

At the same time, emerging federal guidance—putting the onus on employers to develop “appropriate policies” consistent with “federal, state, and local regulations and guidance, and informed by industry best practices”—provides little comfort. Regulations and guidance may intentionally or unintentionally impact labor and employment law, tort liability, force majeure and other principles to excuse contractual performance, and insurance coverage and recovery, among other legal issues.

1. Monitor Federal Guidance

The recent debate between President Donald Trump and the governors over who controls reopening confirmed an unstated truth: this remains a government-centric moment. That debate has for the most part been resolved, at least in the abstract: the federal government in most cases lacks the same authority as state and local officials to direct American businesses to open or close.

So the president has deferred to governors and mayors to dictate closures and reopening schedules in their states—even as he asserts the centrality of the federal government’s efforts, and DOJ announces that it is monitoring state and local orders for constitutional violations.

One tool the president has within his power is the Defense Production Act, a statute passed during the Korean War. Alarmed by the closure of meat processing plants, the president concluded that meat processors should “continue operating and fulfilling orders” and ordered Secretary of Agriculture Sonny Perdue to leverage the statute “to ensure that meat and poultry processors continue operations consistent with the guidance for their operations jointly issued by the CDC and OSHA.”

As the Department of Agriculture gives life to this broad directive, the focus will turn to the intersection between federal, state, and local government orders and guidance.

Food supply chain initiatives may follow what has happened elsewhere during Covid-19, where the federal government has announced national standards through guidance (as opposed to formal rulemaking). Tracking and understanding this guidance is a critical first step for companies. Examples include:

The White House recently issued “Guidelines for Opening Up America Again.” These guidelines suggest employers “[d]evelop and implement appropriate policies, in accordance with federal, state, and local regulations and guidance, and informed by industry best practices,” regarding social distancing, temperature checks, and the like. In other words, the opening federal government salvo to supposedly “open up America again” appears to place the burden on employers to develop policies.

The Department of Homeland Security issued guidance before the outbreak on critical infrastructure sectors, which has changed and expanded during the crisis. Many state and local officials have incorporated this guidance into their orders. Some industry participants have cited this guidance in interactions with suppliers and with local authorities.

Other federal agencies—such as the Centers for Disease Control & Prevention, the Occupational Safety & Health Administration, and the Equal Employment Opportunity Commission—have issued their own guidance on various issues such as maintaining healthy business operations, temperature checks for employees, testing, and personal protective equipment.

This federal guidance will help inform industry expectations, particularly on topics where there is no applicable state or local order. In some instances it may either supplant, supplement, or conflict with existing regulatory obligations. In certain cases, it may also be indicative of, and help shape, evolving standards of care asserted for state tort law purposes.

Although plaintiffs’ lawyers can be expected to claim that guidance is “law,” recent executive orders clarify that, absent some other legal hook, guidance does not create binding legal obligations. Similarly, a violation of guidance is not supposed to serve as the basis for federal enforcement—but time will tell as to whether overeager regulatory enforcers will attempt to improperly use guidance as a sword as opposed to its proper role as a shield.

General counsels can help their companies prepare for this onslaught by systematically documenting the steps they took to promote employee and customer health and safety before reopening. If those policies are later second guessed, the company will have done the necessary due diligence to explain and defend the reasonableness of its actions to regulatory enforcers and judges.

2. Follow State and Local Orders on Closing and Reopening

For businesses active in multiple jurisdictions or across state lines, navigating the evolving state and local restrictions in a return-to-work era will be particularly burdensome. In some ways, this new “reopening” phase may prove more difficult than navigating the initial wave of “stay at home” orders at the outbreak of Covid-19.

Every American business has been affected by the patchwork of state and local “stay at home” orders closing all but essential and critical infrastructure businesses. Businesses required to close must wait for those orders to expire, terminate, or be modified before reopening (or perhaps sue). Even some essential businesses are not operating at full capacity because they have been forced to limit their operations.

Now, state and local officials are beginning to issue a new patchwork of orders, slowly reopening businesses. Officials are adopting phased reopening approaches that incrementally authorize reopening and easing of restrictions for limited numbers and types of businesses at a time.

Many of these reopening orders will place restrictions and obligations—such as social distancing, masks, and temperature-screening—on businesses before they can reopen. Many of these requirements will be new, and will potentially conflict with existing regulatory norms or even other orders.

Some states have not been satisfied with issuing dozens of mandatory orders—they have also issued guidance to “help” businesses that cover a variety of the same topics as the federal guidance. Although federal guidance may not be binding, state guidance may be treated differently under state law and by local officials.

If the initial abrupt shut down is any indication, local law enforcement will certainly treat such utterances as mandatory in many instances, leaving the legal details to be sorted out by others.

3. Watch for Conflicting Local Orders

States are only part of the puzzle as American businesses prepare to reopen. Many local jurisdictions have issued their own orders that complement—or in some cases conflict with—state orders. In California, for example, nearly every county and city has restricted individuals and businesses in their jurisdictions. Those orders sometimes conflict with state-wide orders.

In some cases, governors have expressly preempted conflicting local orders. For example, an executive order by Texas Gov. Greg Abbott (R) preempts “any conflicting order issued by local officials in response to the Covid-19 disaster.” In Colorado, counties can apply for a local variance from the state order, but the governor expressly permitted local jurisdictions to adopt more restrictive rules.

Compliance will be just one piece of the puzzle. Companies also need to anticipate plaintiffs citing even superseded stricter standards as a relevant standard of care.

The bottom line is that general counsels must carefully navigate a minefield of state and state and local orders and guidance.

4. Prepare for Global Regulatory Challenges

Multinational corporations face unique challenges coordinating their efforts to reopen in the U.S. and across the globe.

Nearly every country has imposed its own restrictions on business operations during Covid-19. In some cases, global restrictions may conflict with U.S. restrictions, making it difficult to adopt and implement uniform policies throughout the company. General counsels for multinationals will have to contend with a similar patchwork of government restrictions when restarting operations overseas.

These global challenges unfold amidst a sea change in the legal and operational environment for multinational corporations. Put simply, Covid-19 threatens the prevailing business model of the past quarter century—based on global supply chains largely disassociated from geopolitics, a multi-national labor pool, and relatively frictionless business travel. The issue is not only the outbreak, but the shifts in government rules and incentives inspired by Covid-19.

Companies with international operations and supply relationships need to prepare for a new wave of restrictions, regulations, and regional fragmentation. In Washington, a version of this debate has been underway for several years, but Covid-19 has reshaped the dynamic. The Trump administration has imposed export restrictions, issued new orders linking food and medical supply capacity to national security, and encouraged domestic manufacturing and North American supply chains.

At the same time, lawmakers are considering programs to incentivize companies to shift manufacturing from overseas. Some are debating novel exceptions to the principle of sovereign immunity that, if enacted, would reshape international commerce. Analogous debates and policy shifts are occurring in key capitals throughout the world, threatening a new era of shifting and contradictory restrictions on trade and investment.

Similar considerations apply for business travel, as categorical restrictions on international travel are now a standard tool of policy embraced by advanced economies across the world.

Some aspect of these restrictions could endure for months or years, potentially in the form of intrusive health tests and background checks. Sending an employee to a meeting in another country may now involve undertaking a legal analysis of national and local travel restrictions, geopolitical tensions and related liability risks, and quarantine measures that may apply upon arrival or return.

In short, there is no institutional blueprint for what comes next on the international stage. These global regulatory challenges will test the ingenuity of multinational companies and their general counsels.

5. Brace for Litigation, Oversight, and Blame-Shifting

The Covid-19 crisis will send shockwaves through the courts, the halls of Congress, and state capitols for years to come. General counsels should prepare now for the litigation, investigations, and blame-shifting sure to follow.

The litigation effects of Covid-19 will be wide-ranging. Plaintiffs’ lawyers are already signaling that companies receiving federal and state funds should prepare for False Claims Act and related qui tam suits.

Businesses should also plan and prepare for commercial disputes arising out of contractual force majeure clauses and for negligence claims from employees and customers claiming violations of an alleged duty of care during Covid-19. There is a current debate on Capitol Hill over liability protection, and certain presidential and agency orders (such as those issued pursuant to the Defense Production Act and the PREP Act) include some liability protection.

The investigations will be just as onerous. The Treasury secretary is already threatening “audits” for companies that took large loans under the CARES Act (without offering any additional detail or citation to legal authority). Of course, congressional investigations inevitably follow from major legislative action. And state attorneys general are already signaling that they intend to investigate and prosecute violations of state laws during Covid-19. These actions are unfortunately part of a predictable arc that inevitably follows a crisis.

Taken together, the future challenges for general counsels may be more complex than navigating the current crisis.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Donald F. McGahn II leads the government regulation practice at Jones Day. Before rejoining Jones Day in 2019, he served as Counsel to the President of the United States.

Brett A. Shumate is also a partner in the government regulation practice. Before joining Jones Day, he served in the DOJ as deputy assistant attorney general for the civil division’s federal programs branch.

This article represents the personal views and opinions of the authors and not necessarily those of the law firm with which they are associated.